Glimmer Of Hope Watch: The Return Of Junk

April 19, 2009

I agree with Krugman that it's way too soon to assume the crisis is behind us--as he says, we're just starting to feel the pain in commercial real estate, and, even if the economy recovered tomorrow, unemployment would continue to rise for a long, long time.

Having said that, the Journal had some genuinely encouraging news from the credit markets yesterday:

Junk-bond investors snapped up nearly $4 billion of new issuance this week and pushed prices higher when the bonds traded, marking one of the best weeks in this market since last year.

This is the most raised in one week since June 2008, according to data provider Dealogic.

On Thursday, strong demand allowed computer-disk manufacturer Seagate Technology to place $430 million of junior 10% notes at a discount of 95.32 cents for a lower-than-expected yield of 11.25%.

The Seagate deal indicates investors are becoming more comfortable with risk, a positive sign for the high-yield market and the companies that depend on it for financing. While Seagate is rated at the top of the speculative-grade spectrum, the junior, or second-lien, notes mean they are further down in the repayment pecking order than other recent note offerings. ...

The high-yield market is up 9.8% in the past month alone, according to the Merrill Lynch High-Yield Master II Index, pushing year-to-date gains to 11%.

For obvious reasons, the junk-bond market is usually the first to freeze up when credit conditions worsen, and the last to thaw out when they improve. ("Worsening credit conditions" basically means investors have lost their appetite for risk, and junk bonds are the riskiest form of debt.)

Now, this improvement is pretty clearly the result of a massive government effort to inject money into the credit markets. So it's not like the improvement is happening on its own. Still, it's pretty damn reassuring to see the government initiatives work. The alternative would be incredibly demoralizing.